Fiscal Cliff: The Debate of 2013

Falling off the fiscal cliff in 5 days isn’t what Americans need to fear. There is a much more formidable enemy awaiting them… and the world.

The writing is on the wall. It seems likely the United States will either fall over the fiscal cliff, as is, or there will be a wish-washy agreement that kicks the can down the road a few extra months. The 2nd possibility will leave the major issues unresolved.

Either way, what happens next will make last year’s divisive battle over raising the debt ceiling limit seem like a kumbaya party.

The Ominous Possibility

Truth is, the U.S. can plunge over the fiscal cliff and survive. The world will not end on January 1st. Many have correctly described it as a fiscal ‘slope’ rather than a ‘cliff’.

Even Defense Secretary Leon Panetta, more affected by cuts than anyone, says he can survive without layoffs or cutbacks for months. Right now, everyone in government is scrambling to come up with their own contingency plans in their own departments to mimic Panetta, should the likely outcome happen next Tuesday. Their task is easier.

The ominous possibility is… they will succeed!

What Happens After January 1st?

Congress will do what it does best… artificially create an even bigger fiscal disaster further way.

Congress begins another long, cantankerous, ideological argument over what to do about debt in the new year. Departments will rearrange their budgets to further delay fiscal cliff effects.

Since the Congress and Presidency remain fundamentally unchanged after the November elections, the arguments and the results of the arguments will remain unchanged.

Jaded Americans will think things are hunky-dory. The difference, though, is this… the hidden stakes get higher… higher than the debt ceiling debates of the past.

This time, though, deeper current-year budgetary effects are on the line. The effect of indecision dragging on into 2013 will be longer term weakness in an already weak economy.

Lackluster private-sector job growth will continue and more forced public-sector layoffs will return. It could drag on within the American economy for several years regardless of what the ultimate fiscal cliff solution is.

Conclusions

The negative effects of Congressional inaction and lack of leadership will intensify in 2013. International confidence in the value of a dollar will wane more. It already has 33% less global buying power overseas against the Euro than in 2000.

Quantitative easing and other Fed internal monetary policy will further dilute and devalue the dollar. Investor confidence will erode. We will be lucky if another reduction in the federal government’s credit rating is the only outcome.

The U.S. dollar is the currency of world trade. It is the cornerstone of U.S. global economic dominance. Should dollar confidence falter then the world economy falters along with it.

The prospect grows more likely unless U.S. lawmakers face reality and act fiscally responsible to reinvigorate the U.S. economy. That is looking less and less likely.

We can and will survive contact with reality, after years of self-deception, just as organized religions came to accept the discovery by Copernicus in 1543 that a fountain of energy is at the center of the solar system, and empirical fact that Galileo had to explain at his trail in 1633 as a Divine order that persistent observers could decipher, although it fit none of the previous models of reality.